Is The Recently Launched PMVVY A Go Or A No-Go?

The PMVVY (Pradhan Mantri Vaya Vandana Yojana) was launched recently, in an attempt to address the burgeoning problem of post retirement income for India’s senior citizens. The plan itself is a fairly straightforward 10-year annuity plan with a guaranteed rate of return.

In a financial world replete with fine prints and disclaimers, PMVVY surely scores in terms of simplicity: the retired (60-plus) annuitant commits a lump sum of money at the beginning of the plan, and starts receiving an “end of period” annual, bi-annual, quarterly or monthly income for the next 10 years.

The rate of return ranges from 8 per cent to 8.3 per cent per annum, and carries a sovereign guarantee. Those opting for the monthly income receive the lowest rate of return whereas those opting for the annual income receive the highest rate of return.

Salient Features

The LIC has been provided the sole privilege to operate the PMVVY (no surprises there!) and this would surely act as another shot in the arm for the already bursting-at-the-seams Life Insurance behemoth. You can subscribe for the plan through your friendly neighborhood LIC agent, from the LIC website, or at an LIC office.

Annuitants can potentially generate an income ranging from Rs 1,000 per month (12,000 per annum) and Rs 5,000 per month (60,000 per annum) across all family members – which include his/her wife/husband and dependent children if any.

Use this simple table to arrive at the income quantum generated for a deployment of Rs X into this plan – for the monthly income mode, the minimum allowed amount is Rs 1.5 lakh, and the maximum amount is Rs 7.5 lakh. Discounts to this amount for the annual, half-yearly and quarterly modes serve to increase the effective yield of the plan.

For instance: if one deploys Rs 3 lakh into the PMVVY and select the half yearly mode of income payout, they’ll receive Rs 300 X 81.3 = Rs 24,390 annually, or Rs 12,195 on a bi-annual basis.

In case the annuitant dies during the 10-year term, his or her dependent receives the purchase price back. Upon survival too, the purchase price of the plan is returned to the annuitant. So, in effect, the PMVVY has a ‘return of purchase price’ clause built into it.

What’s Good

The sovereign guaranteed 8 per cent to 8.3 per cent is an obvious plus point. This is actually better than the returns provide by most annuity plans, including LIC’s. The hugely popular Jeevan Akshay VI, for instance, provided an annuity of Rs 66 per 1,000 for the return of premium option – this is likely to be even lower if a seventh iteration is launched, in view of falling interest rates.

Some have mentioned the 10-year annuity period to be a drawback – actually, this is a plus point. With PMVVY, annuitants can re-assess their situations after ten years and adjust their sails in case there are better options available. Regular annuity plans are extremely hard to exit, once purchased. An early exit option for up to 98 per cent of the purchase price has been provided as well, if required for the treatment of a critical illness for oneself or one’s spouse.

What’s Not So Good

The obvious drawback here is that PMVVY does little to solve the actual problem of retirement income generation – after all, what good is Rs 5,000 per month for an entire household, that too not increasing in tandem with inflation? Even for those belonging to LIG’s, Rs 5,000 per month is unlikely to suffice as a sole income.

Additionally, the returns from PMVVY are fully taxable as regular income, and the contribution does not qualify for tax deductions. This essentially brings down the real return from the product for retirees with other income sources, such as consulting or rental. For a pensioner in the 30% income tax bracket, the real return works out to a best case 5.8 per cent, for the annual income mode.

The lack of liquidity from PMVVY means that a senior citizen will be unable to draw on it in case of medical emergencies.

Final Verdict

If you’re a pensioner whose cumulative income doesn’t exceed Rs 2.50 lakh per annum, you could consider the PMVVY as a source of partial income. If, however, you fall in the higher tax brackets, the real returns don’t justify the 10-year lock in period. Instead, opt for a tax efficient SWP strategy using short term, accrual based debt mutual funds – despite the non-guaranteed income, your yields are likely to be higher – not to mention, with much higher liquidity!